It is not profitability estimates based on business income and expenditure forecasts that determine funding needs. Funding needs are determined by cash flows. And cash flows could be quite different from income and expense.
Firstly, cash flows include capital receipts and payments e.g. loan receipts, payments for machinery, office fixtures and such. Secondly, receiving and extending credit could mean that completion of a transaction and its associated cash flow could occur on very different dates.
So you construct a cash flow statement estimating receipts and payments for each month or quarter. You take each business transaction and estimate when the associated cash receipt or payment would occur. The receipt or payment is then included under the relevant month or quarter column.
You start with the opening balance of cash, add receipts and deduct payments for the month or quarter, and arrive at the closing balance. This is carried to the next month or quarter and the process is repeated for the remaining columns.
The statement might indicate that with existing sources, there would be a deficit of cash in certain months or quarters. Such deficits call for additional funding, in the form of borrowings or injection of additional equity.
It is for justifying such additional funds that the profitability statement would be needed. Profitability computations would indicate whether the business would generate adequate surpluses to service the borrowings or provide satisfactory returns on equity.
Your funding requests should thus be supported both by profitability and cash flow estimates. In addition, you include projected balance sheets i.e. statements of assets, liabilities and equity as at period ending dates. The balance sheets would not only reveal the soundness of overall debt/equity relationship but also serve as a check on the correctness of the arithmetical computations.
A final statement you would need is a breakeven analysis. This analysis would show at what level of sales your business would cease making profits. This is a critical computation showing by how much your forecasted sales could fall before you enter the danger zone.
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